Time for Ontario to allow municipalities to defend their tax base

An important article in the Globe and Mail highlights a significant issue facing local governments across Ontario.

As major commercial and industrial property owners win tax assessment appeals, wriggling out of the responsibility of paying municipal taxes, it is reaping devastating impacts on local finances.

The details themselves are telling enough: a pulp mill getting its taxes reduced by 80% because the pulp and paper industry has slumped; a major steel mill getting its property taxed as “vacant” because it had locked out its employees.

But they tell only part of the story.

Many of the examples cited involve either company towns or corporations whose operations have historically accounted for a large share of the local economy.

And that’s where the rest of the story comes in. Ontario no longer permits municipalities to levy taxes on business activity. Taxes are based solely on the assessed value of the property and the general tax rates.

Under the Assessment Act, the value of a property for tax purposes is based on the value of the land and the building, not the value of the equipment inside the building or what goes on inside it.

That value is based on what is on the surface of the land, not on what is underground. So, for example, in a mining operation, nothing below the surface counts—not the minerals, not the structures underground, and of course, not the equipment underground.

Even on the surface, the value for assessment purposes is limited. Unless a piece of equipment is part of the physical structure, it doesn’t count. So, for example, in a steel mill the continuous casting machines and the rolling machines don’t count.

That means that, in the normal run of things, virtually none of the industrial base of Ontario’s single-industry or industry-dominated towns counts as part of the tax base.

When municipalities controlled their own assessments, they were able to create a kind of rough justice framework—with the agreement of the companies—in which these major industries paid higher effective rates of tax as a kind of social contract with the towns that they dominated and that might not even exist if they weren’t there.

When the province took over assessment, those higher effective tax rates were grandparented. And to ease the pain somewhat further, the provincial assessors recognize the reality that there is no “market” as such for purpose-built structures like pulp mills, mines and smelters, and value these properties based on replacement cost.

So the very fact that these major employers are now appealing the taxes they pay towards the support of the towns they dominate is a big deal. It signals the end of the informal social contract that delivered a rough justice level of financial support to single-industry and industry-dominated towns.

And the fact that these employers are winning their appeals—massively, and with significant impact on the viability of the affected municipalities—points to something seriously wrong with the legislation in Ontario that governs how the Municipal Property Assessment Corporation (MPAC) does its work.

Corporate property owners are finding gaps, weaknesses and loopholes to exploit in Ontario’s property tax and assessment system, just as they have in the corporate income tax system.

And just as federal and provincial governments have acted to strengthen and plug loopholes in the corporate tax system, so must Ontario strengthen its property tax and assessment system to defend the municipal tax base.

The loophole that allowed a steel plant to be reassessed as vacant land because the corporation had locked out its employees must be closed.

The legislation should be changed to make it clear that a property cannot qualify as vacant land for property tax purposes unless it actually is vacant land.

The choices of different approaches to the measurement of assessed value should be established in legislation. For example, the use of the replacement cost method of valuation for unique industrial properties should be set out in the Assessment Act, rather than being left to the judgment of assessors.

The legislation should make it clear that owners of commercial and industrial property cannot have it both ways. They cannot benefit from an assessment system that does not include the value of the business in the value of the property and then argue that a weakness in the business justifies a reduction in assessment.

The legislation should explicitly exclude the economic circumstances of the business—which is not part of the tax base—from consideration in establishing its assessed value.

The legislation should either: (1) explicitly prohibit the use of proxy measures of business activity as the basis for determination of the value of real property; or (2) be changed to provide that all fixed machinery and equipment employed in the business of the property owner or occupant is included in its assessed value.

In other words, property is either assessed as real property or as a business, but not as some combination of the two.

The old days, in which major employers in single or dominant industry towns reached an accommodation with the municipality as to a fair contribution from the employer to the community, are gone. Property taxes are just one more cost to be minimized, regardless of the impact on the community.

Ontario must wake up and modernize its property assessment legislation to protect this critical source of revenue for local government.

Economist Hugh Mackenzie is a CCPA Research Associate. Follow him on Twitter @mackhugh

3 comments

  1. This is all well and good. But please keep in mind we are in a Federal Election here. I will read what is important….and do my best to understand it.

  2. Interesting, but very biased, article. Indeed, it is inappropriate to disparage these companies who we admit have invested so much capital over the years, have gainfully employed hundreds or thousands of residents and created ancillary economic benefit, have paid high amounts of taxes over decades, etc…and, as you say, without whom some of the towns may not even exist. But just because they were once thriving enterprises or once paid high amounts of tax, does not mean they are immune from economic changes or declines in value – and there is nothing “fair” about a community ignoring those hardships or pretending they do not impact a company’s ability to continue maintaining such tax liabilities. We have, in fact, seen communities continue to overly tax companies vital to their own economic survival – while the company still had a chance – until the burdens of taxation helped push the company completely out of business. That’s called “cutting your nose off to spite your face”. The end result isn’t good for anyone. In reality, the “ad valorem” tax system was designed as a means to tax everyone (individuals and companies alike) based on the market-value of the property they own. In this manner, everyone is treated fairly and equitably, and everyone pays an amount of tax that is in proportion to the “property wealth” they own. It is not based on “cost”, but on “market value” – what you could sell it for or what the property would command if disposed of to another user. Monetization value in exchange. Such is a fair system, when properly applied, and it has worked well in many other places. But when an asset depreciates – rather than appreciates like most real estate – and the assessing authority ignores this market reality and uses another measure (like cost), then they are discriminating against that particular category of property. The usual suspect is Industry – where economic conditions or manufacturing bases have declined and the properties are no longer worth anywhere near what they were in the past, then the “market value” of those properties must be adjusted downward. To do otherwise treats and taxes these companies differently than all other forms of real property – what’s “fair” about that? And it makes it even more difficult for those industries who are suffering to survive or remain competitive. We’ve already seen many areas employ lower assessment ratios to residential property than to commercial property, or perhaps limit or cap the assessments and taxes on residential property (while not doing so on commercial or industry). This has happened in many parts of the US, effectively transferring the responsibility of taxation from individuals to companies. Sounds good politically, but these are the companies that employ residents and without whom the community wouldn’t survive. And these companies that manufacture goods our residents purchase, what do they do when their costs increase? They must pass those through in the price of products to survive. It simply isn’t “smart” economic policy to pervert the property tax system in a way that tries to punish industry, or that ignores market changes in value. The “ad valorem” system of property taxation was well conceived – the more we tinker with and distort it, the worse it becomes.

    1. Well said, Patrick.
      Tinkering with a market-value based property assessment system to achieve TAX policy objectives can only obscure and erode the tax principles of equity and transparency that the property assessment should reflect.

      The public’s ability to understand a market-based assessment and the taxpayer’s right to challenge assessments helps keep the spotlight where it belongs – on tax policy and tax burden accountability. The assessor and property assessments are too often the convenient scapegoat when taxing authorities are reluctant to equitably distribute the tax burden onto voting taxpayers. Industry and commerce may have some influence but they have no vote in municipal elections.
      It is essential, however, that the industrial (or commercial) assessment be reasonably accurate. A tough challenge when the assessable assets are not exchanged in property markets.
      The assessor then necessarily relies upon a cost approach to value in determining industrial property assessments. It is important to understand that the cost approach to value provides for physical, functional and ECONOMIC depreciation – however difficult the latter may be to measure.
      It is also important to understand, in considering economic depreciation, that the Business Enterprise Valuation allocates value first to real property, then to personal property, and any residual to the intangibles such as goodwill of the business.
      Assessment policy and procedures that reflect the foregoing can provide equitable and understandable property assessments for determining distribution of the municipal property tax burden.

      In his article, Hugh Mackenzie alludes to possible regulation of industrial property assessments as a solution. In my experience, over the course of time, these tend to become outdated and inaccurate. For example, in the province of BC where 17 types of major industry property types were regulated in the late 1980s, the underlying assumption is that the relative economic positions of those 17 industries is the same almost 30 years on. Regulated solutions tend not to be re-visited, no matter they become unfair, as no one willingly opens such a Pandora’s box.
      The assessment system needs to be based on tax principles of fairness, equity, transparency and efficiency. Tax policy needs to provide for accountability by taxpayer and taxing authority alike. Difficult to achieve, but well worth the effort if we are to build sustainable communities.

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